PE Hub just did an interview with GTCR principle Phil Canfield about all sorts of fun stuff, like this impending M&A Boom that’s coming this year. Before I get into his remarks, let’s do a quick and dirty summary of our last PE/M&A boom (Forgive the gross over generalizations and run-on-sentence):
Lazy/unqualified investors (Pensions, endowments, CLO’s, etc) seeking yield, outsourced “diligence” to the NRSRO’s, themselves hopelessly conflicted with these same investors, enabled various corporate and sponsor M&A deals, often themselves enabled not by fundamentals (or even “fundamentals”) but by “innovative financing” the details of which were often too complex for these aforementioned investors and Ratings analysts. As this snowballed, equity prices zoomed skyward as everyone adopted a “mee-too” mentality, further adding-to the mountains of M&A/LBO debt and associated derivatives until, *shocker* it all came crashing down. The equity, the debt, and, oh yes, the derivatives. Anyone remember Gordian Knot? Perhaps the most aptly-named financing vehicle in history, but I digress (and realize that’s a much larger/slightly different issue, but couldn’t help myself, shh!)
The Reformed Broker mostly echoed my expectations a few days ago, although as you’ll see, mine are a bit more harsh, another *shocker* I know.
GTCR’s Canfield cites a few reasons why he and his cohort expect a new M&A boom (these are partial summaries and my reactions. Read the PE Hub article for his full responses):
- Rebound in valuations: Non one wanted to sell their company at 2008 levels even though everyone wanted to buy cheap, alas, no activity. This year, while I disagree but am not surprised to hear, acquirers and targets see more eye-to-eye on valuation. Let me remind you, while I have no doubt there’s exceptions and good values to be had, just taking a look at the retail index and the broader incicies, really? Check it out, that’s the past 3 years, 3/07-3/2010. Somehow (and again, this is very 30,000′ level), were it my money at stake, I’d be VERY careful buying any company at 2007 valuations, especially consumer discretionary.
- Availability of financing and increased liquidity. True, high-yield issuance has recovered substantially, but, and this is what I love (but not my area of expertise so I’ll be brief), CLO markets. Also, he mentions the increased cash on S&P 500 companies balance sheets…Does anyone see a similar pattern starting to emerge here?
- Oh, and the best part, the true reason (at least for sponsor-backed deal-making): half a trillion dollars of committed but uncalled capital, capital that’s only locked-up for another 2 or 3 years.
So, lets make sure we all understand what’s going on here: If PE firms don’t spend this $500bn in the next 2 or 3 years they have to give it back to investors. I think, well, hope, even the most novice observer should realize by now that little, if any of that money will go un-spent.
Instead, PE firms are on the clock searching for deals, AFTER valuations have largely jumped back to pre-crash levels, with the same/similar kind of financing arrangments/structures that caused (at least fueld) the bubble.
What’s the saying about myopia again? “Those who fail to learn from history are doomed to repeat it?”
Ya, this will end in tears.
LP’s: I wish you the best of luck with your PE portfolio’s over the next 5-10 years.
A sharp twitter follower points out (and I can’t believe I didn’t think of this myself, argh!), there is a solution for some LP’s: systems like GS TRuE. I’m hardly an expert on unregistered securities trading, but seems like his suggestion could work…anyone care to comment?